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Directors facing closer scrutiny than ever
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Sanchia Temkim
Business Day
Monday, May 10, 2010
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The prestige of holding more than one nonexecutive directorship is being overshadowed by the greater personal vulnerability to which it exposes directors, particularly those who lack the requisite experience or time to fulfil their fiduciary duties to companies.
New companies legislation and corporate governance principles are aimed at improving regulatory oversight and redress for shareholders and other stakeholders.
“For the first time directors’ levels of responsibility have been legislated by the government,” says Michael Katz, chairman of corporate law advisers Edward Nathan Sonnenbergs.
“There is a misconception in the legal and financial community that the whole arena of company law has changed,” he says.
However, this is not the case, Katz says. The common law has always required that a director act with due care and in the interests of the company, and that he act in good faith.
What has transpired, is that directors’ duties and obligations have now been codified.
This means that there will now be more scrutiny than ever before of directors.
The new Companies Act introduces the fiduciary duty of the director and the concept of “reasonable care”.
“No longer will mere attendance at a board meeting with minimum participation be sufficient or accepted by those seeking redress against directors for loss,” says Eric Levenstein, a director at Werksmans. “Board packages may be carefully scrutinised by directors.”
Stephen Kennedy-Good, an associate at Deneys Reitz, says the codification of directors’ duties is a positive change to the law and in line with international norms in jurisdictions such as Australia.
“There are suggestions that provisions of the new Companies Act may ‘trigger flight’ from boardrooms because careless conduct could have catastrophic implications, not only for the company but also for the directors personally,” he says.
“However, I don’t believe this to be the case.”
Katz says a director will be held liable for breach of his fiduciary duty for any loss or damage that the company suffered as result of it.
In such a case, the director may be sued by creditors, employees or shareholders.
Katz points out that the Companies Act introduces a provision that prohibits directors from carrying on the business recklessly. The courts have tended to take the view that if a director shuffles assets and liabilities within a group and disregards the corporate boundaries of the group, it could amount to reckless trading.
In addition, if a director incurs liabilities under insolvent circumstances, it could also amount to reckless trading, he says.
Levenstein says that in such circumstances a director will have to apply to court for a company’s liquidation. If the company is trading in insolvent circumstances, then the company will be obliged to apply for urgent liquidation, he says.
This usually takes place where the company continues to incur debts and there is no prospect of the creditors receiving payment, Levenstein says. If the director does not proceed with a liquidation application, then he may be held personally liable under the law.
“The incurring of credit at a time when directors know that the company will not be able to meet its liabilities when they fall due, will be tested by the court in order to substantiate that a director should have placed the organisation into liquidation,” he says.
Levenstein says the court will also take into account the detail of financial information available to the director, together with the veracity of the information.
“Obviously if a director is in charge of operations, he will not be expected to be privy to the same level of financial information as the financial director.”
The King 3 report on corporate governance, which became effective on March 1, will also be a useful guide for directors to ensure they are toeing the line, he says.
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